Retailers are exploring fee-based programs like Amazon Prime

Amazon Prime is the most widely known and used online membership program. And it's been so successful for the company that other online retailers are now beginning to explore their own up-front, fee-based programs.

Google, Instacart, Jet, Sephora, and Thrive Market have each formed some type of members-only program for online shoppers that gives consumers added benefits in exchange for an up-front yearly fee.

In a report from BI Intelligence we define what an e-commerce membership program is and how retailers are taking the Costco model and updating it for the online shopping age. We also assess the advantages and disadvantages of e-commerce membership programs for the retailer, as well as what consumers might look for in these programs and what incentives are needed to get people to sign up. And we include examples of how some e-commerce companies are structuring membership programs and provide an outlook for other retailers and product categories that could benefit from employing the membership model.

Membership programs offer retailers a number of advantages, including increased spending. About 40% of Prime members spend more than $200 on Amazon over a 90-day period compared to 13% of non-Prime customers. Once customers pay an up-front fee to a retailer they are likely to return and shop more often in order to realize a greater return on that initial payment.

But there are also major challenges for retailers operating membership programs. The services offered to members often come with added costs for retailers, such as absorbing delivery costs, which may not be easily recouped. In addition, retailers must clear a high bar in order to convince customers that they are offering a service that's actually worth paying extra for.

Free delivery and lower prices are the top benefits retailers include in their membership programs. 74% of US consumers say that free delivery motivates them to shop more online, and 50% say lower prices do, according to Boston Consulting Group. While Amazon Prime emphasizes free delivery, lower prices are the primary attraction of soon-to-launch Jet.

The membership model is proving especially attractive for grocery delivery companies. Although Instacart doesn't break out what percent of customers are part of its membership program, the grocery delivery startup is reportedly handling over $1 million in sales a week, and accounting for up to 5% of weekly sales for some Whole Foods locations.